Online: time to focus on cost to serve

John Lewis is one of the winners out of Christmas 2014 with online sales growth of 19 per cent. Nevertheless, managing director Andy Street told the BBC: “My personal hope is that this is the high water mark for Black Friday. I don’t think we can put the genie back in the bottle but do we need to stoke that fire anymore? I personally hope not.”

Malory Davies FCILT, Editor.

Street’s comment will strike a chord with many retailers. The run-up to Christmas has seen some heavy discounting, and sales growth has come through channels where the cost-to-serve is at it highest.

For logistics operators too, it has been a difficult period. Yodel got caught out by the sheer volume of parcels to be delivered as a result of Black Friday and had to defer collections from retailers by 48 hours. Worse still has been the fate of City Link, which shut its doors on Christmas Eve as a result of unsustainable long term losses.

While some, like John Lewis and Amazon, have been able to take advantage of the Christmas opportunities, there have been warnings that other retailers have been forced to slash prices and profit margins in a bid to compete, according to Julie Palmer, retail expert at Begbies Traynor. “But unfortunately, sales volumes have failed to keep pace.”

Palmer delivered that warning just before Christmas. Over the next few days more retailers will be reporting their Christmas sales figures – it will be instructive to see how many report significant improvements.

Common sense would suggest that, for many, a rethink of online strategy is overdue. A world where online growth comes at the cost of heavy discounting for the retailer and pressure to reduce prices for the logistics provider is ultimately unsustainable.

One area of focus is efficiency of online operations and the integration with store supply chains – getting the cost to serve down will be critical going forward.

And click and collect is an obvious area for expansion. At John Lewis, for example, click and collect overtook home delivery this Christmas and now accounts for 56 per cent of online orders. It’s relatively cheap and it brings customers into the stores.

The other area that will be under intense scrutiny will be free delivery. Delivery is never actually free, of course. If the customer doesn’t pay for it, the vendor has to.

There is a logic to offering free delivery in a new market that is growing strongly – it’s part of making sure you get your share of that growth.

But its hard to believe that any retailer would like to see free delivery become embedded as the online market matures. Expect to see moves to squeeze it out of product offers over the next year.